The Rally Should Continue Through Wednesday Before Taking A Break!

January 5, 2009
Author: Peter Stolcers, Founder of OneOption

In the course of the last week, the momentum has shifted in favor of the bulls. The Santa Claus rally has lifted us through resistance at SPY 92. In order for this rally to continue, it will need to follow through early this week. Otherwise, it will be deemed as another head fake. The news has been fairly light and that favors the bulls. Weak economic data has been taken in stride and the market continues to march higher. This morning, stocks have shrugged off early weakness and they look poised to grind higher. Overseas markets reacted well to our rally last week and they finished in positive territory. The market will eventually test SPY 100. If it breaks through that level, it could run considerably higher. In today's chart you'll notice that an inverse head and shoulders pattern has formed. SPY 100 represents the neckline. If we break through that level, the next major resistance lies at SPY 110. That represents a down gap that needs to be filled. SPY 125 would be a best case scenario for the bulls and it represents major resistance. The difference between the neckline and the low is 25 points. If you add that to the neckline, you get SPY 125. That level also represents horizontal resistance. With the 200-day moving average at 119, that is a tall order. I feel it's too early for the market to make such a major move and I believe we will struggle to get through SPY 110 in the first quarter. There is euphoria ahead of President-elect Obama's inauguration. However, the problems are widespread and the proposed solutions will simply postpone economic hardship. I feel the market has enough momentum to rally the next day or two. It will stall ahead of the Unemployment Report. The number will be dismal and after an initial decline, prices will stabilize and the rally will continue. Don't construe my comments as being long-term bullish. The market is deeply oversold and a financial collapse has temporarily been avoided. We are due for a short covering rally and we need to assume that it will be much greater than we expect. I still like selling puts in the energy sector. Basic materials stocks also look solid. My long-term bearish perspective will prevent me from getting overexposed during this rally. Trade it cautiously. image

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